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White Swans, Pink Flamingos
May 6, 2013 08:24 AM
JEFF COOPER TALKS TECHNICALS
Editor's Note: The following is a free edition of
Jeff Cooper's Daily Market Report
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You said no strings could secure you at the station
-White Room (Cream)
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribble of a few years back…soon or late, it is ideas, not vested interests, which are dangerous for good or evil.
-John Maynard Keynes
I served seven years as the chair of the Princeton economics department where I had responsibility for major policy decisions, such as whether to serve bagels or doughnuts at the department coffee hour.
How much would you pay to avoid a second Depression?
Monetary Policy is not a panacea.
But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?
-Alan Greenspan, December 5, 1996
Irrational exuberance is the last term I would use to characterize what is going on at the moment.
-Alan Greenspan, March 15th, 2013
I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.
-To succeed, you will soon learn, as I did, the importance of a solid foundation in the basics of education -- literacy, both verbal and numerical, and communication skills.
They say the most ferocious rallies occur in the midst of bear markets.
Is it possible the current advance since 2009 is a cyclical rally in the midst of a secular bull market?
Before shrugging off the possibility, consider that the false breakout to new all-time highs in 1973 was followed by a devastating 2-year 50% decline.
As noted in this space at the time, a major turning point was due in the fall of 2012.
I believed it could lead to the
Mother of All Short Squeezes
with the possibility of a date with destiny above
(INDEXSP:.INX) 1600, which would satisfy a possible 13-year Megaphone Top.
Last week I suggested that a move with authority past this May time frame and through 1600 suggests that the market has room to run in time and price and that I was wrong about a top by the end of the first quarter of 2013.
This is the crossroads.
What would it take to confirm that the correction I’ve presumed would play out to 1450-1470 will not play out?
Forgetting for the time being whether a 10% correction from around here would be a great buying opportunity or the beginning of what could be a great 3rd leg down in a secular bear market -- perhaps the greatest leg down since the 2000 top.
Now that we’ve blasted through 1600, complacency may be too tempting and it may be all too easy to embrace the idea that the coast is clear for the long run.
Long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.
-John Maynard Keyes, 1924
Bull markets are born in pessimism, grow on skepticism, mature on optimism and die of euphoria.
-Sir John Templeton
On Friday, the
) traded at 15,000 for the first time in history, along with the S&P reaching 1600 for the first time ever. How important are round numbers, really?
Are these levels new floors or ceilings?
In the market's collective psychology, round numbers often trump rational reactions, especially in an environment where there seems to be a great disconnect between Main Street and Wall Street.
Let’s take a quick look at a few other episodes of round numbers and their psychological impact.
The 100 level on the DJIA was first exceeded in the mid 1920’s. The DJIA exploded to just under 400 by September 1929.
The DJIA tagged 1000 in 1973 but failed to break out. 1000 remained a ceiling for nearly another 10 years. Rule of Alternation?
It took from 1966 to 1982 for the DJIA to blast through 1000.
The DJIA exceeded 10,000 for the first time in 1999, running up to nearly 12,000 before faltering in the 2000-2003 bear market and crashing back below 10,000.
Now, the DJIA has reached another milestone at 15,000. Will it explode above it like a knife through butter on top of an already greater than 130% rally since March 2009?
Following the greatest declines of the last century off the 1929 peak and the 1973 peak respectively, it took substantial base-building over time for the markets to recover. Not so following the collapses from the 2000 peak and the 2007 peak.
Arguably, the markets took their cue in the last two busts of the last decade from the Greenspan Put and the Maestro’s “whatever it takes” musicianship following the 1987 crash. Clearly a precedent was set. Clearly, the similarity between the pattern in 1987 and the pattern in 1929 had the boyz in the chartroom in the basement of the FOMC running around with their hair on fire. Clearly the legacy of President Reagan’s marching orders, “I don’t know what that was, but don’t let it happen again”, has been taken to an entirely new level -- "whatever it takes” squared, if you will.
So, this is the backdrop of the runaway move to 15,000 DJIA and the 200 point move to S&P 1600 in 4 months. That and ‘whatever it takes’, whatever it costs, to avoid another Depression apparently.
This brings to mind an interesting question: if the headline in the WSJ says the DJIA is making new highs, does it preclude that there is a Depression rolling underneath the surface of an asset wave?
In order to get a feel for the nature of the advance since November 2012, let’s step back and take a look at some of the factors we examined back in November that suggested a major low:
First and foremost, the fall of 2012 was due to be a major turning point with it being 60 months from the October 2007 top and 120 months from the October 2002 low.
It could have been a high or a low.
This 60-month cycle (a fractal of Gann’s master 60 year cycle) has had an important signature since at least 1982 when 60 months from that low was the big 1987 top. 60 months from the big explosion in early 1995 came the major spring 2000 top. 60 months from the 2002 low marked the 2007 pre-crash high.
As it happens, as is Mr. Market’s perverse nature, September 2012 marked an important pivot high, implying the POSSIBILITY of some left translation in this 60-month cycle for a top. From there, a decline played out into mid-November 2012.
As it turns, out the significant October time frame fell right between a September pivot high and a possible November pivot low.
Why was November a possible pivot low, demonstrating some right translation for the big 60-month cycle?
Let’s walk through again what we offered in November in this space:
From the March 666 low in 2009 to the September 2012 high at 1474 is a range of 808 S&P points. 808 is 90 degrees square mid-November. So, mid-November squares the major range from March 2009 to September 2012, implying a square-out of this range in November which could mark a major turning point. Consequently, the pullback into November 2012 could have defined a low OR a downside acceleration.
From March 2009 to the September 2012 peak is a period of 42 months. On the Square of 9 Wheel, 42 is 90 degrees square November 20th.
From the major March 6, 2009 low to the November 16, 2012 low is 1351 calendar days which ties to the closing low in mid-November at 1353.
So the turn up from the November 2012 low occurred at an important level: the November low at 1343 held just above 2X the 666 low from March 2009, or 1332.
In addition, we noted that December 2012 would be the 49th month since the November 2008 crash low around the world. As you know, 7 squared or 49 marks an important culmination count in Gann Methodology, often coinciding with the beginning or the end of panics.
A major higher low following the November 2012 low played out in December 2012 with the S&P exploding in an runaway move marked by an historic stretch of no more than 1 to 3 consecutive days against a persistent trend.
December was key for a higher and potentially impulsive pivot as it was 180 degrees in time from the June 2012 pivot low and 90 degrees in time from the September 2012 pivot high.
Again, Mr. Market faked left and hooked right with a Fiscal Cliff shakeout at the end of December.
I can’t help but notice the runaway move following the Fiscal Cliff ‘non-event’ and the Mayan Calendar non-event seem reminiscent of the New Age runaway move in 2000 when Y2K proved to be a non-event.
The subsequent break in the
) was NOT a non-event.
This April was the 49th month from the March 2009 low and with the market once again faking left and hooking right at the beginning of May, it remains to be seen if this will mark a culmination (49 months up from low) or will be the beginning of a new stampede above a round number.
My presumption has been that an authoritative move past 1600 and May could buy the market a substantial amount of real estate, if you will.
Theoretically, a blow-off could play out to the end of the Gann count into the 55th month of the Gann Zone. Interestingly, this ties to what is often the fateful month of October.
Time-wise, May is also potentially pivotal as it is 180 degrees from the November low.
Good or bad, regardless of what the NFP numbers were, as offered in Friday morning’s pre-market report, it ‘felt’ like there was an agenda to jam the S&P through 1600 on the important Friday weekly closing basis. Thursday’s knife right back up through Wednesday’s stab down had the fingerprints of the agenda all over it. All morning on Friday, before the numbers were released, the futes took on all sellers. They wouldn’t dip a dime.
Remember, we noted that the end of April was year-end for a big technology fund. Often, the next 2 or 3 sessions see a spike up where those in the loop can establish shorts and cheap puts, and then the portfolio is offered to the market early the next month.
In addition, bull market tops often see highs 2% to 3% above a prior bull market high. In this case, that ties to around 1624 or 3% above the 2007 high at 1576.
One 360-degree revolution above last year's 1468 to 1474 highs ties to 1625 to 1628.
What would it take to indicate a new stampede here?
I think holding above 1628 for more than 3 days suggests that possibility.
In addition, I would watch for a possible Spike and Reversal from around 1635.
Why? Mid-May is 180 degrees opposite from last November’s low. Mid-May is 90 degrees square a price of 1635.
I had thought that a marginal move over 1600 to say 1603 could prove terminal, IF an exhaustion was playing out into Friday’s numbers because 1603 vectors/aligns with May 3. However, the time/price harmonics of 90 degrees SQUARE have proved more significant since 2000.
For example, the October 2002 price low at 768 was 90 degrees square the week of the low.
Ditto, the October 2007 price high at 1576 was 90 degrees square the week of the high.
The first pullback to a backtest of 1597-1600 may be a buy. I would get defensive on a decline below 1597 and I would not be long on any decline below 1590.
Even if the market is poised for another big leg up, I think there is a better-than-average likelihood of a meaningful decline (as in 10%) prior to that playing out. We’re going to walk through where in the scheme of time and pattern we think we are in that eventuality in tomorrow’s report.
No positions in stocks mentioned.
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